BSP firm on policy settings

The central bank reiterated on Wednesday it does not have to follow the recent monetary policy actions of other major central banks but has to stay alert over the identified risk factors that could prompt a change in policy direction.

“Every time a major central bank makes a move, and in this case, shifts policy, the rest of the world pauses and takes stock, especially given the interconnectedness of global markets,” Bangko Sentral ng Pilipinas (BSP) Governor Amando Tetangco Jr. said in reaction to China’s latest monetary policy action cutting its benchmark interest rates.

On Tuesday, the People’s Bank of China decided to cut its 1-year benchmark lending and deposit rates by 25 basis points (bps) each, to 4.6 percent and 1.75 percent, respectively. It also lowered its reserve requirement ratio by 50 bps.

In the Philippines, volatility in the peso and stock markets in recent days has been in line with the market movements in the region, Tetangco said.

“It will be unnatural if there would have been no adjustment in our financial markets. There are external forces at work,” he said.

What the BSP is watchful about is the movement in the foreign exchange market, which should not be excessive. The central bank looks into market conduct to check that there is fundamental demand behind action in the spot market, he explained.

“We need more data to help guide our next steps toward a policy rate action – in particular, [to see]if there would be need to support domestic demand or manage inflation expectations,” Tetangco said.

In terms of signals coming from the US Fed, the BSP governor said it is best to make sure the Philippines has the tools in place to shield its own markets from near-term shocks.

“As I have said on occasions in the past, we should not be distracted from our own programs for growth by what is happening externally,” he said.

Given the lag of monetary policy, Tetangco said the BSP may not need to adjust settings as yet, unless: “Oil falls significantly more from where we are now (or reverses trend); or El Nino intensifies and becomes extended; or global growth slows significantly or deviates from trend; or financial stability risks become heightened because of uncertainties from market views on the Fed actions.”

“There are many things we need to consider and these are all moving at variable speeds.
We need to exercise care in our next steps,” he added.

Since September last year, the BSP has kept its rate for overnight borrowing at 4 percent and overnight lending at 6 percent.

It also kept the special deposit account (SDA) rate steady at 2.50 percent, while the reserve requirement ratio (RRR) for banks still stands at 20 percent.